Commercial Loans Blog

Foreclosures and Junior Liens

Posted by George Blackburne on Mon, Jun 29, 2009

Just Learned an Interesting New Term of Art - Lien Clearing

As a hard money commercial lender, Blackburne & Brown has to foreclose on about ten to fifteen commercial properties every year. Contrary to what you may think, we never make money when we foreclose on property - never. I wish we didn't have to do it, but it's a necessary evil in this industry.

After foreclosing on ten to fifteen properties every year for the past twenty-five years, I have noticed an interesting fact. Hardly no one ever bids at commercial foreclosure sales. We have sold a commercial property at a foreclosure sale just once in twenty-five years.

Therefore, if you are the holder of a junior lien on a commercial property that goes to a foreclosure sale by the first mortgage ... well, you're toast. No one is going to over-bid the amount of the first mortgage. You will almost surely be wiped out by the foreclosure.

This week we foreclosed on an office in the foothills of the Sierras. It's a beautiful building. There was a $2 million second mortgage behind our $3.3 million first mortgage, and this second mortgage loan was completely wiped out.

We also wiped out a $350,000 mechanics lien that was junior to our loan.

As we prepared for the foreclosure, one of our attorneys used an interesting term: lien-clearing. Our successful foreclosure cleared off the title to the property and left us owning the property free and clear of any competing claims for the property.

The junior lienholders, in my opinion, made a fatal error when they failed to cure our senior loan. The second mortgage holder and the mechanics lien holder should have banded together and each chipped in enough dough to payoff our first mortgage.

Instead, they went to the foreclosure sale hoping that someone would over-bid our first mortgage. In real life, this never happens.

Topics: commercial real estate loan, commercial loan, commercial mortgage loans, commercial mortgage rates, commercial lender, foreclosure of a second mortgage, commercial financing